REAL ESTATE investors, it seems, are catching a fever in the nation's capital. But it's not hay fever that has them in a tizzy (though, as residents will tell you, that's a common affliction in these parts as well). Around the world, investors are gravitating to the Washington, D.C., MSA because of its high barrier to entry and strong apartment fundamentals.
Vacancy rates and rent growth are among the heartiest of those fundamentals. The area's vacancy rate of 4 percent is projected to fall to 3.8 percent in 2013, according to New York–based market research firm Reis. Those figures are trending well below the national average of 4.7 percent as of the second quarter of this year, the lowest such rate since the end of 2001. In addition, current annual effectiverent growth in the Washington metro sits at 2.1 percent, with increases to 3.7 percent and 4.7 percent, respectively, projected for 2013 and 2014.
The Washington apartment market is cautious nowadays, with the election approaching, an influx of new product coming, and potential federal government reductions looming. But while the metro may not produce the short-term figures we've become accustomed to, the area nonetheless is poised for robust growth. Moreover, Washington is consistently one of the top-performing markets in the country.
Washington's mixeduse Class A product, unsurprisingly, is in high demand, and developers such as The Bozzuto Group, The JBG Cos., and Archstone are focusing on area submarkets such as Arlington and Alexandria in Virginia and the NoMa submarket and 14th Street/U Street corridor in D.C. Bozzuto is expected to deliver Cathedral Commons in late 2013—a twoblock, mixed-use project in Northwest Washington that will include 137 apartments, eight townhomes, and 128,000 square feet of retail space. Additionally, investors are also showing interest in secondary markets that off er potential value-add opportunities and asset repositioning.
The top-performing submarkets in the metro are Dupont Circle/Adams Morgan and Woodley Park in the District, and Northeast Alexandria in Virginia, which report average asking rents ranging from $1,208 to $1,973 and vacancy rates of 1.9 percent to 3.1 percent.
One of the greatest threats facing the Washington apartment market is its potential for oversupply. The area is projected to deliver 11,308 units from March 2012 to March 2013, with 96 percent of these currently under construction. And next year will be even bigger, with 13,081 units expected to come on line from the second quarter of 2013 through the first quarter of 2014, with approximately 72 percent of these anticipated deliveries under construction, according to Alexandria, Va.–based Delta Associates.
However, the pipeline of anticipated deliveries over the next 36 months seems to have peaked, and the number of planned units versus units under construction is declining. This trend is expected to continue.
Another widely discussed issue is the threat of potential federal spending changes. Although such changes would certainly affect the local economy, the depth of that impact wouldn't be as disastrous as many believe. In fact, the federal government's budget changes will be implemented over a 10-year period, thereby lessening the effect on the economy.
As a result of increased supply and slower growth in federal spending, the Washington MSA's apartment fundamentals may change. To maintain equilibrium between supply and demand, the metro will need to realize job growth and will rely on anticipated changes in household formations. Delta Associates projects job growth sufficient for a healthy local economy, with 37,700 new jobs per year estimated through 2015. Plus, the prime demographic for renters, those 20 to 34 years of age, should grow each year through 2030.
The bottom line is, the current elevated supply of apartments and the federal government's decrease in annual spending rates are potential short-term factors that could dampen the area's apartment market. However, it's expected that local fundamentals will remain favorable as a result of moderate economic recovery, strong demographics, and household structures that support renting versus buying. As a result, Washington is, and will continue to be, one of the top performers nationwide.
Ryan Ogden is a principal of McLean, Va.–based ARA Mid-Atlantic.